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Squaring the Predatory Lending Circle: A Case for States as Laboratories of Experimentation

The article analyzes recent, innovative state responses to the phenomenon of predatory lending as a case study for evaluating the oft-cited justification for federalism, most famously framed by Justice Brandeis: encouraging the states to act as laboratories of experimentation in matters of public policy. The article first attempts to provide the most comprehensive understanding of the complex and shifting predatory lending phenomenon to date. The article begins by locating the dangerous practice within the broader and otherwise generally desirable subprime lending market - a market that lends to traditionally underserved borrowers. It then analyzes the complex dynamic of changing consumer credit demand and increasingly securitized mortgage lending supply, which has driven the explosive subprime lending growth, and attempt to identify core practices that can be classified as predatory. It next demonstrates why existing legislative remedies and traditional market forces are insufficient deterrents to predatory lending, and documents the devastating impact predatory lending has had on low-income and minority communities. Second, the article charts the recent, but remarkable, response to predatory lending occurring among the states and demonstrates why, despite looming threats of preemption, state experimentation in the predatory lending area should be encouraged as a paradigmatic social laboratory, consonant with Justice Brandeis' federalist ideal of producing innovative, responsive and effective public policy. In so doing, this article also attempts to answer a recent challenge by prominent scholars to identify a real, measurable value of federalism, by providing a model of how our federal system can best respond to a variety of social and economic policy problems.